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September 5, 2012

ECB To Buy Short-Term Bonds With No Public Cap: Sources

Bond buying to be sterilized to avoid appearance of printing money

ECB headquarters in Frankfurt. (Photo: AP)

European Central Bank (ECB) President Mario Draghi’s plan to buy bonds will be unlimited but will also be focused on government bonds with short maturity, rather than any other type of assets, and also will be sterilized to avoid any charges that the central bank is printing money.

Bloomberg reported Wednesday that, according to unidentified sources familiar with the proposal, there will be no public cap set on yields and the target will be government bonds with maturity dates of up to three years. The euro rose above $1.26 Wednesday morning on reports of the plan.

The proposal, which may be titled “Monetary Outright Transactions,” is set to be considered later Wednesday, with Draghi announcing on Thursday whether its terms have found consensus. The ECB would not comment on the plan other than to refer to an August 20 statement that said it was misleading to report decisions not yet made.

While the sources expected Jens Weidmann, head of the Bundesbank, to be the sole objector, they also said that it was likely the plan would be approved. One aspect of the plan is the so-called sterilization, which would require the ECB to remove from elsewhere in the system the same amount of money it devotes to bond purchases. That would keep the money supply impact neutral.

Since the central bank’s interest rate is currently zero and cash is flooding banks to the tune of some 800 billion euros ($1 trillion) in excess liquidity, it is expected that even a large bond purchase program will not present the ECB with problems.

Among the other plan provisions revealed by the sources were no seniority for the ECB on any of its bond purchases; no publicly set yield-spread targets or bands; no internal targets and only discretionary interventions.

On the flip side, Draghi is expected to emphasize that the ECB will likely stop buying bonds of any government failing to adhere to conditions it must accept in order to receive aid from the European rescue fund. Countries must request aid from the rescue fund before they will be eligible for the ECB to take any action, said the sources. There is also the plan for the ECB to sell bonds it has bought from any country that does not comply with conditions imposed on it.